Iowa ‘sin taxes’ help balance the budget

CEDAR RAPIDS — They're not the revenue generators that income and sales taxes are, but the nearly $543 million a year Iowa collects from so-called sin taxes on alcohol, tobacco and gaming helps keep the state budget in balance.

Taxes on Iowans' vices account for 6.6 percent of state revenues, according to data compiled by the U.S. Census Bureau 2014 Annual Survey of State Government Tax Collections and the Rockefeller Institute.

Practically speaking, Iowa House Ways and Means Chairman Tom Sands, R-Wapello, said many lawmakers don't pay much attention to sin tax revenue because it pales in comparison to the personal income tax and sales tax. They make up about 80 percent of revenue collections, he said.

'I'm guessing the typical lawmaker looks at the bottom line rather than where the revenue comes from,' said Sands, whose committee handles tax legislation.

The 6.6 percent of revenue coming from sin taxes doesn't raise any red flags, Sands said, but in some cases those tax rates are too high. A fiscal conservative, he admitted he'd like to see most — maybe all — taxes lowered.

'It's a question of how much is enough and how much is too much,' he said. 'I think Iowa has crossed the 'enough' line, especially with tobacco taxes.'

He was referring to the 2007 decision by the Legislature to raise the tax on cigarettes from 36 cents to $1.36. That raised about $153 million a year in new revenue, according to tax increase advocates.

'It's always much easier to raise a tax on someone else than yourself,' he said about that tax hike and sin taxes in general.

States collectively took in about $32 billion in taxes on tobacco, alcohol and gambling in fiscal year 2014.

Like Iowa, several states have raised tobacco taxes in recent years. Since 2000, states enacted a total of 111 tax increases on tobacco products and another 23 on alcohol, according to the National Association of State Budget Officers.

However, cigarette taxes aren't a promising long-term revenue source as consumption has been dropping for years.

Sands called raising sin taxes 'low-hanging fruit for people who like to raise taxes.'

Don Racheter, president of the Public Interest, a non-partisan think tank at Iowa Wesleyan College in Mount Pleasant, thinks sin taxes is a misnomer employed by politicians who want to raise taxes.

'Christ, the one person about a third of humanity believes was without sin, gave wine to his followers,' Racheter noted in a recent essay.

As long as Iowans think their legislators are taxing 'sinful' behavior, 'they are probably not as likely to take to the streets to protest' out of fear that their friends and neighbors will think less of them for defending such behavior, he wrote.

Although the Census Bureau report's numbers strengthen his position that some taxes are too high, 'I won't occupy my time trying to lower them,' Sands said.

'I don't think there is any appetite for that,' he said.

Iowa collected $225,375,000 in tobacco taxes in 2014 or 42 percent of the $542,862,000 in sin taxes. That's up from the 32 percent of sin taxes the Iowa Legislative Services Agency attributed to tobacco in 2012.

Dave Reynolds of the LSA didn't challenge any of the Census Bureau numbers, but did say that it appears the Census Bureau does not track the revenue in the same way as his agency. The Census report seemed to include some license fees and local taxes LSA does not.

Iowa's reliance on sin taxes is ninth highest among the states, according to the Census report. But it is well below Rhode Island, which gets nearly 16 percent of its tax revenue from sin taxes.

The 10 states in which sin tax revenue accounted for the largest percentage of tax collections were:

• Nevada, 14.8 percent

• West Virginia, 11.5 percent

• New Hampshire, 9.9 percent

• Delaware, 9.4 percent

• Louisiana, 9 percent

• Pennsylvania, 8 percent

• Indiana, 6.8 percent

• Iowa, 6.6 percent

• Montana, 6.5 percent.

On the other end of the spectrum, California gets just 0.9 percent of state revenue from sin taxes. Sin taxes nationally amounted to 3.7 percent of total state tax revenues in 2014.